Five key players in the radical-Left Syriza movement – meeting in the Maximus Mansion in Athens yesterday – took an ice-cold, calculated, and carefully-considered decision not to pay.

They knew exactly what they were doing. The IMF’s Christine Lagarde was caught badly off guard. Staff officials in Washington were stunned.

On one level, the “bundling” of €1.6bn of payments due to the IMF in June is just a technical shuffle, albeit invoking a procedure last used by Zambia for different reasons in the 1980s. In reality it is a warning shot, and a dangerous escalation for all parties.

Syriza’s leaders are letting it be known that they are so angry, and so driven by a sense of injustice, that they may indeed default to the IMF on June 30 and in so doing place the institution in the invidious position of explaining to its 188 member countries why it has lost their money so carelessly, and why it has made such a colossal hash of its affairs. The Greeks accuse the IMF of colluding in an EMU-imposed austerity regime that breaches the Fund’s own rules and is in open contradiction with five years of analysis by its own excellent research department and chief economist, Olivier Blanchard.

Greece’s public debt is 180pc of GDP. The loans are in a currency that the country does not control. It is therefore foreign currency debt. The IMF knows that Greece cannot possibly pay this down by draconian austerity – the policy already implemented for five years with such self-defeating effects – and the longer it pretends otherwise, the more its authority drains away. It is has pushed for debt relief behind closed doors but only half-heartedly, unwilling to confront the EMU creditor powers head on. Objectively, it is acting as an imperialist lackey – as Greek Marxists might say. Indeed, it has brought about the worst possible outcome. The Fund’s man on the ground in Athens – Poul Thomsen – has pushed the austerity agenda with a curious passion that shocks even officials in the European Commission, pussy cats by comparison. This would be justifiable (sort of) if the other side of the usual IMF bargain were available: debt relief and devaluation. This how IMF programmes normally work: impose tough reforms but also wipe the slate clean on debt and restore crippled countries to external viability. It is a very successful formula. On the rare occasion when the IMF goes wrong it is usually because it tries to prop up a fixed-exchange rate long past its sell-by date. All of this went out of the window in Greece. The IMF enforced brute liquidation without compensating stimulus or relief. It claimed that its policies would lead to a 2.6pc contraction of GDP in 2010 followed by brisk recovery. What in fact happened was six years of depression, a deflationary spiral, a 26pc fall in GDP, 60pc youth unemployment, mass exodus of the young and the brightest, chronic hysteresis that will blight Greece’s prospects for a decade to come, and to cap it all the debt ratio exploded because of the mathematical – and predictable – denominator effect of shrinking nominal GDP. It is a public policy scandal of the first order. One part of the IMF has issued a mea culpa admitting that its own analysts misjudged the fiscal multiplier badly. Plaudits to them. Another part of the Fund continues to push new variants of the same indefensible policies, demanding a combined fiscal squeeze from pension cuts and VAT rises equal to 1pc of GDP this year and 2pc next year even as the economy lurches back into recession. Ashoka Mody, former chief of the IMF’s bail-out in Ireland, refuses to criticise his former colleagues on the European desk, but the meaning of the words I quoted last night are clear enough. “Everything that we have learned over the last five years is that it is stunningly bad economics to enforce austerity on a country when it is in a deflationary cycle. Trauma patients have to heal their wounds before they can train for the 10K." “I am frankly shocked that we are even having a discussion about raising VAT at all in these circumstances. We have just seen a premature rise in VAT knock the wind out of a country as strong as Japan."

“Syriza should recruit the IMF’s research department to be their spokesman because they are saying almost exactly the same thing as Syriza on the economics of this. The entire strategy of the creditors is wrong and the longer this goes on, the more is its going to cost them.” The IMF’s Original Sin in Greece was to allow the urbane Parisian Dominique Strauss-Kahn to hijack the institution to prop up Europe’s monetary union and the European banking system when the crisis erupted in 2010.

Former IMF chief Dominique Strauss-Kahn

The Fund’s mission is to save countries, not currencies or banks, and it certainly should not be doing dirty work for a rich currency union that is fully capable of sorting out its own affairs, but refuses to do so for political reasons.

It was of course a difficult moment in May 2010. The eurozone was spinning out of control. There were no backstop defences – due to the criminal negligence of Europe’s leaders and banking regulators – and fears of a euro-Lehman were all too real. Yet leaked minutes from the IMF board meetings showed that all the emerging market members (and Switzerland) opposed the terms of the first loan package for Greece. They protested that it was intended to save the euro, not Greece. It loaded yet more debt onto the crushed shoulders of an already bankrupt country, and further complicated the picture by allowing one large French bank and one German bank – no names please – to offload much of their €25bn combined exposure onto EMU taxpayers. “Debt restructuring should have been on the table,” said Brazil's member. The loans “may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”. Arvind Virmani, India’s member, was prophetic. "The scale of the fiscal reduction without any monetary policy offset is unprecedented. It is a mammoth burden that the economy could hardly bear,” he said.

“Even if, arguably, the programme is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the programme itself." This is exactly what has happened. The Fund might have atoned later by acknowledging its special duty of care towards Greece and softening the terms. It did not do so. We should hardly be surprised if Syriza is now on the warpath. The IMF needs to be careful. It has itself become an emblem of bad governance. Mr Strauss-Kahn was caught inflagrante delicto, only to be replaced instantly in a political stitch-up by another French finance minister (of quality and integrity – but that is not the point). Mr Strauss-Kahn’s predecessor was recently indicted in Spain for fraud. The institution cries out for reform. There is no justifiable reason why the job of managing-director should go by divine right to a European, nor why the Europeans still control eight seats on the IMF board. You might make a parallel argument about the British, French, and Russian vetoes at the United Nations. I would not disagree. These anomalies should have been sorted out at the time of the Strauss-Kahn debacle – along with quota reform blocked by the US Congress – all the more so since China and a host of rising reserve powers were already bursting onto the scene by then. Leadership failed. The West disgraced itself. No wonder Asia is now going its own way with a rival set of bodies. Greece’s firebrand government is bringing matters to a head for an institution already in trouble, but one with a superb staff and still worth saving.

Christine Lagarde, head of the IMF

Mrs Lagarde must stop playing the role of a diplomat. She must take off her European hat and speak instead for the organisation she leads and for the world. She must confront the EMU creditors head on and in public. She must tell them, in blunt language, that they share much of the blame for the current impasse. She must make it clear to them that Greece needs sweeping debt relief – as a matter of economic science, whatever the morality – and that the refusal of the creditors to face up to this elemental fact is now the chief impediment to a solution. And she should tell them that the IMF will no longer play any part in their deceitful charade. If she does not do so, and if the lack of leadership by Europe’s political class leads to a catastrophic denouement on every level, then let it be on her head too.

Rising Challenges to Growth and Stability in Latin America in a Shifting Global Environment

Good morning everyone – Buenos días,Bom dia!Distinguished speakers and guests, welcome to Washington and thank you for taking part in this conference on Latin America. This impressive gathering of senior policymakers and intellectual leaders is part of our continuing dialogue on the central issues confronting the region and the policies needed for the future.All of us at the Fund are very excited about this year’s Annual Meetings in Peru. And today’s event is an important “mile marker” on our “Road to Lima”.A major focus of our discussions in Lima this fall will be the region’s future prospects. There are numerous challenges on the horizon. And yet, as the Managing Director noted during her recent visit to Brazil, there is also immense opportunity.Harnessing that opportunity to create a brighter future for the region will require making the right choices—and I would like to emphasize that the Fund is here to help our Latin American members in that effort.In this spirit, I would like to share my perspectives on three topics:

From a long-term perspective, Latin America has made remarkable strides in terms of economic growth, financial stability, and social progress.Since the early 2000s, policy frameworks in the region have been clearly stronger—learning from the earlier debt crisis and a painful decade of lost growth. In many countries, monetary policy credibility has been established, commitment to fiscal responsibility affirmed, and more flexible exchange rates allowed to cushion the impact of external shocks.Importantly, these impressive achievements have been underpinned by crucial social gains – dramatically lower poverty and inequality. Almost half of Latin America’s population now belongs to a vibrant and growing middle class, up from 20 percent just a decade ago. Bringing about this important development has been a variety of path-breaking social initiatives, such as Brazil’s Bolsa Familia program.So yes, there has been great progress in the region. And yet, as we all know, there remains much more to do. This has become especially challenging given that, in recent times, regional growth has softened and concerns about the outlook have increased.Think back to the conference in Santiago last December: at that time, we were all taken a bit by surprise at the collapse in oil prices; there were concerns about the financial volatility related to a U.S. interest rate liftoff; and worries about noticeably slower yet more sustainable growth in China – which has become an important trading partner for the region. In addition to these external developments, some countries were hit by domestic shocks as well.Truth be told, many of these concerns that were discussed in Chile remain with us today. Indeed, the global economic landscape has probably become even more challenging for most parts of the region.For a start, global growth remains modest and uneven, projected at 3.5 percent this year (about the same as last year), and 3.8 percent next year. For many people around the world— especially youth and the unemployed—this pace may not feel like a “recovery.”At the same time, and while commodity prices seem to have stabilized, they are now at a much lower level than in 2011, and are likely to stay around that level for some time. This means that commodity exporters in the region need to prepare for some tough times ahead.Moreover, with a widely anticipated rise in U.S. interest rates and monetary easing in Europe and Japan, new bouts of volatility in financial markets and exchange rates cannot be ruled out.

2. Regional outlook—domestic vulnerabilities exposed

This changing global backdrop has become intertwined with a continuing domestic slowdown in the region.For a fifth year in a row, the pace of economic activity has decreased; growth is projected to dip below 1 percent this year before recovering to 2 percent next year for Latin America and the Caribbean. South America, in particular, is suffering from a loss of momentum; three of its largest economies – Argentina, Brazil, and Venezuela – are likely to contract this year.On the brighter side, however, a stronger U.S. economy will boost prospects for those countries which have the most direct linkages—in Mexico, Central America and the Caribbean—through trade, tourism, and remittances. Other countries in Latin America will benefit as well.More precisely, however, how do shifts in global conditions impact domestic prospects?Back in Santiago we promised further analysis on two key aspects: lower commodity prices and the slowdown in investment. Let me share with you some of our initial findings.First, our analysis finds that if the decline in global commodity prices persists, fiscal revenues will remain under pressure in several countries in Latin America. This is particularly the case where the commodity sector plays a larger role in the economy and where exchange rates are less flexible to adjust. So in countries without much fiscal space, this will require deliberate efforts to reduce budgetary deficits.How about external balances? A deterioration in current accounts from weaker terms of trade is likely to be relatively moderate and temporary. This is due more to import compression than higher exports—so again, a sign of weaker growth.Second, on the slowdown in investment: Our analysis finds that falling commodity prices are one of the main drivers of the investment slowdown in the region. Developments so far have been consistent with historical patterns.What are the implications? Two things: to revive investment and growth, policymakers will need to provide better incentives to promote private investment; they will also need to improve the efficiency and productivity of public investment.Beyond this more immediate impact of commodity prices on growth and investment, an even more worrisome trend is that potential growth has also been marked down for the region. This is the risk of a “new mediocre” we have been repeatedly warning.Mitigating this risk means undertaking much-needed structural reforms to expand the economy’s productive capacity—today and tomorrow. Let me be frank: we simply cannot afford to lose ground in the precious economic and social gains that Latin America has accomplished in the recent past.So how do we go about nurturing our futures and growing our economies? This takes me to my third topic—how to restore strong, sustainable, and inclusive growth in Latin America.

3. Reigniting strong, balanced, and inclusive growth

For a start, high-quality, durable growth will hinge on higher productivity and investment, as well as greater economic diversification. But what are the right incentives to promote diversification, investment, and productivity?The policy priorities are not new:

Latin America needs better infrastructure;

it needs greater ease of doing business;

it needs better education;

it needs to diversify its productive capacities and to take more advantage of regional trade and global value chains; and

it needs to improve institutions and the rule of law.

The pressing issue, of course, is how to implement these policies. How can policymakers achieve these improvements in an environment of slow growth and less friendly global conditions?That brings me back to our gathering here today: we need to find the “how.” And we need to find it together.In the words of Chile’s Isabelle Allende: “We all have an unsuspected reserve of strength inside that emerges when life puts us to the test.”The challenges ahead are non-trivial. Yet the region today is on a much stronger footing from a longer-term perspective, and the IMF stands ready to help all the way—with our resources, including our Flexible Credit Lines, and with our policy advice and capacity building. We are with you.

Conclusión

On that note, let me conclude. As we noted in Chile last December – this is not your grandfather’s Latin America, and this is not your grandmother’s IMF! Both the region and our institution have evolved – and so has our relationship: from one of intensive Fund program-based support to one where the Fund is drawn on more as a trusted advisor and provider of technical assistance.This conference is an important opportunity to take things further forward: to hear your views so that together, we can frame an agenda for Lima that can help us navigate the challenges we face – and claim the brighter future that awaits the region.

SHANGHAI – Economists are increasingly divided over China’s economic future. Optimists emphasize its capacity for learning and rapid accumulation of human capital. Pessimists focus on the rapid decline of its demographic dividend, its high debt-to-GDP ratio, the contraction of its export markets, and its industrial overcapacity. But both groups neglect a more fundamental determinant of China’s economic prospects: the world order.

The question is simple: Can China sustain rapid GDP growth within the confines of the current global order, including its trade rules, or must the current US-dominated order change drastically to accommodate China’s continued economic rise? The answer, however, remains unclear.

One way that China is attempting to find out is by pushing to have the renminbi added to the basket of currencies that determine the value of the International Monetary Fund’s reserve asset, the Special Drawing Right (SDR). As it stands, that basket comprises the euro, the Japanese yen, the British pound, and the US dollar.

The SDR issue was the audience’s main concern when IMF Managing Director Christine Lagarde spoke in Shanghai in April. Her stance – that it is just a matter of time before the renminbi is added to the basket – garnered considerable media attention. (Regrettably, however, the media read too much into her statement.)

Former US Federal Reserve Chair Ben Bernanke faced the same question in Shanghai last month. He was purposely vague in his response: the renminbi’s inclusion in the SDR would be a positive step, he said, but it could not be taken until China makes much more progress in reforming its financial sector and transforming its growth model.

The IMF is expected to vote on the renminbi’s inclusion in the SDR this October, at its regular five-year review of the SDR basket’s composition. But even if, unlike in 2010, a majority votes to add the renminbi to the basket, the United States may exercise its veto power. Such an outcome would not be surprising, given that US opposition (though in Congress, not within the Obama administration) blocked reforms, agreed in 2010, to increase China’s voting power within the IMF.

Limited use of the SDR implies that adding the renminbi would be a largely symbolic move; but it would be a powerful symbol to the extent that it served as a kind of endorsement of the currency for global use. Such an outcome would not only advance the renminbi’s internationalization; it would also provide insight into just how much room there is for China within the existing global economic order.

So far, it seems that there is not enough. In a 2011 book, the economist Arvind Subramanian projected that the renminbi would become a global reserve currency by the end of this decade, or early next decade, based on his observation that the lag between economic and currency dominance is shorter than traditionally believed. Today, China is the world’s largest economy (based on purchasing power parity) and the largest participant in world trade, and its government has been actively promoting renminbi internationalization, such as through the relaxation of foreign-exchange regulations. And yet the renminbi is used internationally much less than Subramanian’s model predicted.

As a result, China remains subject to US monetary policy. If the Federal Reserve raises interest rates, China must follow suit to keep capital from flowing out, despite the negative impact of higher interest rates on domestic growth. Given the US dollar’s dominance in international transactions, Chinese companies investing abroad also face risks associated with exchange-rate fluctuations.

In fact, over the last decade, international trade rules have created significant friction between China and many other countries, including the US. Now, free-trade agreements are being negotiated – namely, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership – that will undermine the continued expansion of Chinese exports to the extent that they raise entry barriers for Chinese firms.

Clearly, China has faced major challenges within the existing global system as it tries to carve out a role befitting its economic might. That may explain why, with its “one belt, one road” initiative and its establishment of the Asian Infrastructure Investment Bank (AIIB), China’s government is increasingly attempting to recast the world order – in particular, the monetary and trading systems – on its own terms.

The “one belt, one road” initiative aims to re-create the ancient overland and maritime Silk Roads that carried goods and ideas from Asia to Europe. Given that the project will entail significant Chinese investment affecting some 50 countries, its appeal in the developing world is not difficult to fathom.

The AIIB, too, has proved appealing – and not just to developing countries. In fact, 57 countries – including major powers like France, Germany, and the United Kingdom – have signed up as founding members, which may reflect a growing awareness of the US-dominated order’s diminishing returns.

From China’s perspective, sustained domestic economic growth seems unlikely within the existing global system – a challenge that Japan and the other East Asian economies did not encounter during their economic rise. Indeed, the only country that has encountered it is the US, when it replaced the UK as the world’s dominant economic and financial power before World War II; fortunately, that precedent is one of accommodation and a peaceful transition.

To be sure, China still needs to undertake important domestic reforms, especially of the financial sector, in order to eliminate distortions in resource allocation and stem the economy’s slowdown. But the refusal by China’s leaders to pursue export-boosting currency depreciation, even in the face of decelerating growth, suggests that they are willing to make the needed sacrifices to secure the renminbi’s international role and, with it, long-term economic growth and prosperity.

Whether or not the renminbi is added to the SDR basket this October, a gradual transformation of the global system to accommodate China seems all but inevitable.

In my professional opinion, as demand in India wanes a bit, amateur technical analysts in the Western gold community tend to get somewhat overly-nervous about what is really just a short term lull in demand.

Unfortunately, I think a lot of the spike in fear each May and June may be related to their excess use of leverage.

There's no need to point gigantic arrows towards drastically lower prices on the gold and silver charts now, regardless of what shapes, patterns, and signals appear to be there.

Charts don't make fundamentals. Fundamentals make charts.

On that note, please click here now. That's the daily chart for gold. The recent price action has been "seasonally perfect". A peak occurred in mid-May, and gold has drifted lower, logically, since then.

The bottom seasonal line: Eager gold and silver price enthusiasts should expect a major rally to begin in about two weeks, and continue for several months.

Please click here now. Gold jewellery is the biggest source of demand for gold, and most jewellers in China, Dubai, and India are in "expansion mode".

Indian gold jewellery demand is growing about 15% a year, while mine supply grows at about 1% a year. Looking at these numbers alone, it doesn't take a rocket scientist to see why borrowing money from banks to bet on lower gold and silver prices, is not very wise.

Gold jewellery was never taken by the US government during the last bout of confiscation/revaluation. It can be insured and stored legally in safe deposit boxes. So, it's truly great news to see the World Gold Council taking concrete steps to further expand demand for the "ultimate asset".

While demand for gold and silver are soft due to the Hindu calendar, the US stock market is beginning to look a bit like an old sailboat manned by heroin addicts, heading into a hurricane.

Please click here now. In the big picture, QE has been tapered to zero, inflationary rate hikes are imminent, US frackers are counting on OPEC to bail them out, and yet mainstream media continues to call the US economy's minus 0.7% performance in 2015 Q1 a "world leader".

Goldman Sachs economists are calling the US stock market overvalued by almost every metric they use. They've lowered their long term forecast to under 2% GDP growth.

Alan Greenspan, who has no "book to talk" now, has called the US government's general approach to building a welfare state "unsustainable". When considering the current minor cyclical lull in gold and silver demand related to the Hindu religion, against the background of the dire need for an America soaked in "debtaholic napalm" to reflate itself, any sane investor is going choose the mighty metals as their prime investment vehicle of choice in the coming years.

Please click here now. That's the daily chart for Barrick Gold. I've highlighted the main recent intermediate trend movements with solid green and red arrows. The arrows are nicely in sync now, with the seasonal gold chart trends. Note the excellent position of my key 14,7,7 Stochastics oscillator, at the bottom of the chart!

I use Newmont as a leading indicator for the entire gold mining stock sector, and Barrick as a confirming indicator. Also, I suggested a few months ago that Barrick was likely to form an interesting right shoulder of a complex inverse head and shoulders bottom pattern, and drop towards the $11 area. That's in play now, and all gold mining stock fans should highlight the mid-June timeframe on their calendars. It's a highly likely turning point for Barrick, and for the entire sector!

Grab the Reins on the Dollar, Part 2

By: Michael Ashton

Tuesday, June 2, 2015

I hadn't meant to do a 'part 2' on the dollar, but I wanted to clear something up.Some comments on yesterday's article have suggested that a strong dollar is a global deflationary event, and vice-versa. But this is incorrect.The global level of prices is determined by the amount of money, globally, compared to global GDP. But the movements of currencies will determine how that inflation or deflation is divvied up. Let us look at a simplified (economist-style) example; I apologize in advance to those who get college flashbacks when reading this.Consider a world in which there are two countries of interest: country "Responsible" (R), and country "Irresponsible" (I). They have different currencies, r in country R and i in country I (the currencies will be boldface, lowercase).Country R and I both produce widgets, which retail in country R for 10 r and in country I for 10 i. Suppose that R and I both produce 10 widgets per year, and that represents the total global supply of widgets. In this first year, the money supply is 1000r, and 1000i. The exchange rate is 1:1 of r for i.In year two, country I decides to address its serious debt issues by printing lots of i. That country triples its money supply. FX traders respond by weakening the i currency so that the exchange rate is now 1:2 of r to i.What happens to the price of widgets? Well, consumers in country R are still willing to pay 10 r. But consumers in country I find they have (on average) three times as much money in their wallets, so they would be willing to pay 30 i for a widget (or, equivalently, 15 r). Widget manufacturers in country R find they can raise their prices from 10 r, while widget manufacturers in country I find they need to lower their price from 30 i in order to be competitive with widget manufacturers in R. Perhaps the price in R ends up at 26r, and 13i in I (and notice that at this price, it doesn't matter if you buy a widget in country R, or exchange your currency at 1:2 and buy the widget in country I).Now, what has happened to prices? The increase in global money supply - in this case, caused exclusively by country I - has caused the price of widgets everywhere to rise. Prices are up 30% in country R, and by 160% in country I. But this division is entirely due to the fact that the currency exchange rate did not fully reflect the increased money supply in country I. If it had, then the exchange rate would have gone to 1:3, and prices would have gone up 0% in country R and 200% in country I. If the exchange rate had overreacted, and gone to 1:4, then the price of a widget in country R would have likely fallen while it would have risen even further in country I.No matter how you slice it, though - no matter how extreme or how placid the currency movements are, the total amount of currency exchanged for widgets went up (that is, there was inflation in the price of widgets in terms of the average global price paid - or if you like, the average price in some third, independent currency). Depending on the exchange rate fluctuations, country R might see deflation, stable prices, or inflation; technically, that is also true of country I although it is far more likely that, since there is a lot more i in circulation, country I saw inflation. But overall, the "global" price of a widget has risen. More money means higher prices. Period.In short, currency movements don't determine the size of the cake. They merely cut the cake.In a fully efficient market, the currency movement would fully offset the relative scarcity or plenty of a currency, so that only domestic monetary policy would matter to domestic prices. In practice, currency markets do a pretty decent job but they don't exactly discount the relative changes in currency supplies. But as a first approximation, MV≡PQ in one's own home currency is not a bad way to understand the movements in prices.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.